Fred Hickey – Buy Gold

Fred Hickey, frequent cited expert on Bloomberg News and Barron’s Roundtable, has been publishing his author extremely well-respected investment newsletter, The High-Tech Strategist, for 31 years. And he is more worried about the state of the financial markets today than he’s ever been.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

While his primary focus has been on analyzing Tech stocks, over the years he has expanded into macro trend analysis as the central banks starting increasingly intervening in world markets and distorting the price of money.

He now finds asset prices dangerously overvalued (within Tech and without) and worries -- as we do -- about the risk of a major market correction and possible currency crises.

Ironically, this lifelong expert in "all things technology" has concluded that gold (the "barbaric relic") is the sanest asset to put one's capital in these days -- both due to its safety factor and it's current level of undervaluation. He expects the precious metals to fare well during the downward market volatility he foresees, and he is now tracking the mining stocks closely as he predicts they will experience dramatic appreciation from here.

What’s happening to gold mining stocks right now is an amazing story. They're extremely undervalued. Just this year, we’ve seen the price of gold hold up during this market decline, yet the miners have been getting slaughtered.

One of the things we look at is the HUI-to-gold ratio, or the gold miner index to gold. That is down to 0.133. Now, that's lower than it was at the 20-year bear market bottom in 2000. It was slightly lower than that at the end of 2015, but we’re talking about near record lows here when the price of gold is up. It looks to me that gold is in a bull market. The charts look that way. It looks that we have higher highs and higher lows, and we’ve gone from $1,050 to $1,330. I think once we go over $1365, which is the old high hit in 2016, then more people will come on board and we’re likely to slingshot higher from there. But the miners have gone in the opposite direction.

I think there’s some reasons for that. One of which is that we have a huge short position built up in the GDX ETF. In the technology world, the Facebooks, and Amazons, and Netflixes, and Googles -- the FANG stocks -- they get propelled higher as the money pours into the ETFs. Well, it works the opposite way in the gold miner area where money has poured out.

In March of 2017, we had 510 million shares outstanding on the GDX. Just a week ago, it was 310 million, or a 40% decline. Now, a lot of that was short interest. We went up to 55 million shorts of a now-310 million share total. 20% of the total shares outstanding in the GDX were short. Now, that’s like Tesla levels -- one of the most favorite shorts on Wall Street. And why would that ever be in a market where gold looks to be in a new bull market? Gold certainly is up more than 20%. And the charts all look like it’s in a new bull market. How could anyone put out this kind of short interest?

Well, it’s one of the problems with the central bank is when you make money as cheap as you do, and you can borrow as much money as you want, then you can play games. It becomes a giant casino. And the people who are playing the short game have helped to drive the price of the miners down at a time when people would have thought they would have risen.

We’ve had this turbulence; the miners should have gone up. Gold held its own. It's up slightly on the year, but the miners are getting killed. The owners can’t get their head wrapped around it, so they get demoralized and then they sell out. I think we saw that, maybe, on Friday (Feb 9). We saw a capitulative moment.

And then what these shorts will do is that then they’ll cover. Now, it’s unfortunate that they get stampeded like this, but it’s the kind of thing you can do when you have the ability to borrow at very low levels and to play games with people. Miners should be going higher. Today, this price of gold is only $30 away from a break-out high yet, the miners continue to go down.

Ultimately, what determines the profitability for miners is the price of gold. Look back at the margins for these miners now, compare them to the bottom. At the end of 2015, they were only making $225 net of all in sustaining costs, so the price of gold versus their all in sustaining costs. And now, it’s double that. It’s $460; yet, the miners haven’t rallied. It’s amazing. This is the same level, almost, that $460 was $490 in 2012 when the GDX was not 21 but 45.

So, we have this huge disconnect between the price of gold and the margins of the miners -- which are doing very well because they had to keep their costs low -- and the price of the stocks. Now, ultimately, that will get corrected. We saw the huge run in 2015, where gold went up 30% in the beginning of 2016 and the miners went up 180%. And we saw that in 2000, when gold went up quite a bit, and the miners went up 1600%. That’s 17 times the average. We saw that in the 1970s coming out of the bear market there. We saw that on the big net buyers went up at least 10 times, and some of them went up as much as 30 times. So, this happens regularly when the miners get depressed. They get out of whack with the price of gold and margins, and then they slingshot higher. And that’s what I think we’re about to see.

We’re right there. I think there’s going to be enormous amounts of money entering this sector once again, just as we saw in early 2000s, just like we did coming out of 2015, the bottom, just as we did coming out of the 1970s mid-cycle correction. So, I’m pretty excited about it.

Click the play button below to listen to Chris' interview with Fred Hickey (52m:41s).